Dollar slides as China manufacturing index hits seven-month low

Chinese manufacturing conditions are deteriorating according to a private index.

Reuters: Bobby Yip

The Australian dollar has lost around half a cent after a Chinese manufacturing index hit a seven-month low.

HSBC's flash China manufacturing purchasing managers' index (PMI) fell 1.2 points to 48.3 in February, and now sits easily below the 50-point level that would indicate improvement in the sector.

The result also missed analyst forecasts in a Bloomberg survey which centred on the flash PMI remaining at 49.5.

The flash index comes out a week before the final data, but usually presents a fairly accurate picture of what the end result will be as it is based on 85-90 per cent of the total responses.

The market moving power of the index was illustrated by a half cent fall in the Australian dollar from just above 90 US cents to around 89.5 after the data was released.

Details of the index made for no better reading than the headline, with output, new orders and stocks all starting to fall, and employment and prices falling at a faster rate.

The report's authors say the slowdown in manufacturing should soon prompt Chinese authorities to act to boost growth.

"The building-up of disinflationary pressures implies that the underlying momentum for manufacturing growth could be weakening," noted HSBC's chief China economist Hongbin Qu in the report.

"We believe Beijing policy makers should and can fine-tune policy to keep growth at a steady pace in the coming year."

However, other analysts have a more sceptical view of the data.

"This report hints that the official manufacturing PMI (released March 1) could print around 50 (last 50.5, consensus not yet available) but we remain of the view that this HSBC PMI series tends to be prone to wilder swings, and tends to regularly overstate the downside," said TD Securities head of Asia-Pacific research Annette Beacher.

She points out that this weak data comes hot on the heels of unexpectedly strong export and import figures, and that January and February are notoriously unreliable for accurate Chinese data due to the large Lunar New Year holiday.

"We believe it is best to wait for more data before crunching real activity forecasts," Ms Beacher concluded.